The World Bank has called for removing various distortions in the labour market by undertaking combination of legal reforms, cultural change and ending discrimination in the public sector employment.

The bank in its latest draft report, —”Poverty in Pakistan: Vulnerabilities, Social Gaps and Rural Dynamics” —says that employment diversification, certain kinds of informal employments and the labour market distortions are associated, and indeed correlated with vulnerability and poverty. This would lead one to ask: how might social norms and social organization affect the functioning of market in general and labour markets in particular, and what might be the implication for poverty?

There are a number of possibilities: there might be overt and hidden discrimination against certain groups, based on group-based prejudice (gender, racial or caste stereotyping, for example, and there might be official sanction for such discrimination in some cases. Or it might simply reflect widespread social prejudice. All these phenomena are evidenced in Pakistan, as in other societies.

According to the draft report, which is said to have attracted a lot of criticism by the government, there is a strong survey evidence that social grouping such as caste, kinship group and ‘biradari’ affect the functioning of the labour markets. The government is urged to exercise policy options to remedy such problems, particularly through legal reforms and a cultural change. Notably, however, the viability of such reforms would be to some extent conditioned on the broader efficacy of the rule of law.

It said that the economics of discrimination might be understood in two ways. Firstly, it is costly to obtain information about characteristics of an individual worker. More easily observable group characteristics, or prejudices, might be used by employers to rank and screen employees. There might be any number of feedback mechanisms that actually encourage individuals belonging to a particular groups to conform to their perceived group characteristics, or prejudices about these group characteristics.

Secondly, employers might prefer to hire workers with some level of social collateral, i.e. those over whom they might exercise some potential leverage through common social networks. The notion of social collateral, more commonly used with reference to credit markets, is applicable also to labour markets if employers face high monitoring costs. Notably, both these proposals - social grouping as screening signal, and social grouping as source of social collateral - relate to situations where employers value information on potential employees, i.e. where skill, effort, and trustworthiness are important.

To evaluate these explanations a qualitative survey was undertaken in six districts in Pakistan with the aim of addressing social grouping and labour market clustering. It found that employment opportunity appeared to be closely correlated with caste, kinship or prior social grouping. This held true across a range of sectors and jobs. Notably, the active decisions leading to clustering of economic activity around specific social groupings primarily concerned the inclusion of particular groups rather than the exclusions of others - supporting the importance of social “collateral” rather than “screening” hypothesis noted above.

“In almost every case, the use of sifarish, or personal recommendation and guarantees, was a significant factor in the history of job clustering. Social collateral was found to be important from the employers’ point of view even in relatively low skills, causal jobs. This revealed the weakness of overall institutional environment vis-a-vis the prior strength and robustness of social grouping, confirmed by the fact that sifarish appeared to work also largely through close caste and kinship networks.

The group, therefore, was clearly significant as a determent of economic opportunity and mobility and therefore also an important feature of poverty traps. These findings have two types of policy implications. First, it is clear that in some cases there is a scope for legal action and possibly even positive discrimination in favour of some historically marginalised groups. Second, however, it is also apparent that the labour market distortions associated with social group clustering is related to the weakness of other institutions, particularly in the realm of rule of law and contract enforcement.

The draft report said that problems such as discrimination are in many instances proscribed by the broader problem of weak rule of law - a fact that must also be addressed by any reforms that would mitigate such distortions. But weak rule of law is also in and of itself a determinant of poverty. While issues such as graft, government effectiveness and legal effectiveness are commonly discussed in the context of growth and private sector development, they also directly impact the poor, and especially due to the regressive nature in the costs they impose. In the light of this, it is particularly notable that though relatively poor countries such as Pakistan rarely score high in the third-party evaluations of each of these issues, on a scale ranging from -2.5 to 2.5 Pakistan ranks nearly one half a point lower than would be expected, given its income per capita.

Violations of the law affecting the poor are commonly, but not systematically, reported in Pakistan. They could be classified by three categories: lack of access to essential services and institutions, expropriation of assets, and vulnerability to coercion/lack of protection of rights. The first arises from the fact that the poor, like all Pakistanis, must pay for goods, services or bureaucratic approvals that are meant to be provided for free, if they are provided at all. In either case, the effect is regressive and affects the poor hardest. Such problems are particularly prevalent in the education system: schools often require documents such as birth certificates, evidence of legal residential status, or national identity cards. The first for instance, are needed to enrol in primary school, or to take its matriculation exam. Yet many poor families have no such documents, and for many, particularly urban squatters, some are simply impossible to obtain.